Risky Business

Insurance Watchdog Caught Napping

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The German financial authority Bafin is not paying attention, say critics.
  • Why it matters

    Why it matters

    The German financial authority Bafin is supposed to supervise and regulate the insurance industry, but critics point to the large number of scandals uncovered by whistleblowers and the press as proof it has failed in its mission.

  • Facts

    Facts

    • The largest of the scandals over the past few years involving some of Germany’s biggest insurers went undiscovered by Bafin.
    • There is little attention paid to sales and marketing strategies that have cost consumers dearly.
    • Deregulation in 2008 has not produced additional competition in the insurance sector, but it has increased premiums and driven thousands of policyholders to cancel their life insurance policies at a cost of 50 percent of premiums paid.
  • Audio

    Audio

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Ergo Insurance Group representatives enjoying sex trips. Deutscher Herold life insurance sales representatives visiting swingers’ clubs. Questionable practices by Debeka to win civil servants and public sector workers for private health insurance plans.

The insurance industry has produced more than its share of gaudy headlines in recent years, but none of these licentious scandals were brought to light by the German federal financial supervisory authority, Bafin. The cases were exposed by public prosecutor investigations or the press.

“It would seem at the moment,” wrote Hans-Peter Swintowski, a German lawyer whose expertise includes private insurance law, “As if Bafin is still in search of a concept of its own identity.” His written opinion came after a roundtable Wednesday initiated by the Green Party on the subject of insurance regulation. A copy of his statement was obtained by Handelsblatt.

Gerhard Schick, Green Party fiscal policy spokesperson, is blunter in his assessment. “Bafin is not fulfilling its legal mandate to avoid or eliminate abuses by insurance companies,” he told Handelsblatt.

Although Bafin thanked Handelsblatt for the “confidential delivery of the points of criticism,” the agency did not want to make a comment prior to a hearing with experts. Bafin has a staff of about 350 focusing on the business activities of insurance companies and pension funds in the name of consumer protection, but critics say it is failing that mandate.

“I am not aware of current or former sales executives responsible for misconduct having been banned from the profession or having other draconian penalties imposed on them.”

Hermann Weinmann, University of Ludwigshafen

Hermann Weinmann, the director of the institute of finance at the University of Ludwigshafen, whose primary focus is the insurance industry, agrees with Mr. Schick. “My impression is that sales methods are not a major concern and the subject of remuneration with its negative implications doesn’t have first priority,” he said, noting the agency has shown little interest in the many scandals.

He is alluding primarily to the excesses in sales and marketing, where health and life insurance policies can be changed to the disadvantage of the consumer, usually without any consequences. “I am not aware of current or former sales executives responsible for misconduct having been banned from the profession or having other draconian penalties imposed on them,” Mr. Weinmann said.

Bafin also appears indifferent to the case of Debeka, which has been the focus of criticism since last fall, when it was discovered that Germany’s largest health insurer was using civil and public service employees to supply tips for locating and soliciting customers. It was only after Handelsblatt reported on the Debeka case that Bafin finally felt compelled to act. The agency shrugged off its late actions, noting, “It was probably just hard to imagine, up until a few months ago, that tip givers’ activities could result in major damage to an insurance company’s reputation.” Bafin now proposes a written agreement governing interactions between tipsters and the insurance company, since they collaborate on a regular basis.

Meanwhile, Bafin’s lack of action on acquisition costs – the direct costs to insurers when acquiring an insurance policy – is incomprehensible to Mr. Schwintowski. Regulatory limits, which were capped at 4 percent of the premium, were lifted in 2008 in the belief deregulation would spark additional competition among insurers. Instead, acquisition costs have soared to as high as 7 percent. “The higher the acquisition and selling costs, the less money that can be invested in the capital market for the policyholder,” he said.

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Ergo invited sales representatives to sex parties at the posh Gellert Thermal Bath in Budapest. Source: laif

 

Additionally, he said, 18.5 percent of life insurance policyholders prematurely cancel their policies, forfeiting an average of 50 percent of the premiums they’ve paid, resulting in billions in annual losses to consumers. “Bafin is taking no steps against the substantial increase in acquisition costs, or against the losses the insured are suffering year to year incurred by the unbelievably high number of premature cancellations,” Mr. Schwintowski said. He notes in comparison that if half of all cars were returned to their manufacturers within five years, there would be an enormous uproar in the automobile industry.

The Green’s Mr. Schick agrees Bafin has a lot of catching up to do in matters of “protection of policyholders and beneficiaries of the insurance benefits.” He accuses Bafin of tolerating illegal conditions for years, noting they stood by and watched as insurance corporations distributed too little dividends to policyholders from the provision for premium refunds. “Funds to which the policyholders are actually entitled have been held by the companies as regulatory capital,” he said.

In contrast to Mr. Schick, Anja Karliczek, the center-right Christian Democratic Union (CDU) member of the German parliament’s finance committee is more reserved in her criticism of Bafin.

“There is no cure for criminal energy,” said Ms. Karliczek, who directs the European Union’s Solvency II Directive, which is designed to codify, harmonize and strengthen insurance regulations throughout the E.U. “More frequent on-site visits by Bafin will contribute to a more stringent control. With Solvency II, the demands will be increased on the key positions in the business while the supervisory powers of the regulators are strengthened.”

Frank M. Drost is a Berlin correspondent for Handelsblatt and covers politics and finances. Ozan Demircan covers the insurance industry. To contact the authors: drost@handelsblatt.com and demircan@handelsblatt.com.

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